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Nobody likes paying off student loans. This can strain your budget and prevent you from reaching your full financial potential.
However, putting extra money into your student loans is not the best choice in all situations. See when paying off your loans faster might not be a good idea, and review some repayment strategies to pay off your debt sooner if you want.
Should you pay off your student loans sooner?
For some people, paying off student debt as quickly as possible is their primary financial goal. But there are times when you shouldn’t rush to eliminate your student loans.
For example, you might not want to sacrifice your future retirement for faster student loan repayment. If your employer matches 401(k) contributions, for example, it might make sense to contribute what’s needed to get the match instead of pouring more money into your student loan balance.
If you’re trying to buy a house, start a family, or start a business, you might want to increase your savings instead of spending extra money on your loans. If you don’t have an emergency fund, you should probably make it a priority instead of paying off your student loans.
Also, if you qualify for any type of loan forgiveness program, you may want to reconsider paying off your loans sooner. You might end up saving more by opting for loan forgiveness, even though you’re technically paying off your student loans over a longer period of time.
But if the above scenarios don’t apply to you, prepaying your student loans may be the right financial decision.
How to pay off your student loans quickly
Paying off your student loans quickly requires a smart and deliberate strategy. Consider the following proven methods:
1. Pay more than the minimum each month
The most obvious way to pay off your student loan sooner than expected is to pay more than the minimum each month. You can use a student loan calculator to see how extra payments might impact your student loans. Play around with different numbers to see how quickly you could get out of debt.
Unfortunately, making extra payments isn’t always as easy as it looks. Each loan servicer handles additional payments in their own way. Some lenders may apply your extra money to interest while others may apply it to your next month’s payment. However, it may make more sense to allocate the extra money to the principal balance of your loan or to the loan with the higher interest rate.
Decide how you want the additional payments applied and see if you can specify this on your lender’s website. If not, contact the lender and ask how to ensure that any additional payments are applied correctly.
2. Make payments every two weeks
Most people only repay their student loans once a month. But if you pay your student loans every two weeks, you’ll end up making an extra payment during the year.
Here’s how it works: Suppose you halve your monthly student loan payment and pay that amount every two weeks. If you make half a payment every two weeks, you will end up making 26 payments throughout the year. This equates to 13 full payments per year. If you pay once a month, you will only make 12 payments throughout the year.
By making 13 payments a year instead of 12, you could save on interest charges and pay off your loan sooner than expected. For example, suppose you have $20,000 in student debt at an interest rate of 6%. If you pay every two weeks on a 10-year loan term, you could save over $650 in interest and pay off your debt a year sooner.
3. Reconsider your repayment plan
If you want to pay off your student loans faster, switching to a shorter repayment term can help you do that. However, shorter repayment terms will generally result in a higher monthly payment. Make sure you can afford the new amount before switching.
Borrowers with federal loans have access to several types of repayment plans. Log in to your Federal Student Aid (FSA) account to see which plan you are currently enrolled in. The shortest repayment term is the standard or progressive 10-year plan. If you don’t participate in any of these plans and aren’t working on canceling your loan, you can change your repayment schedule. The official FSA Loan Simulator can show you how your payments would change on each plan.
If you have private student loans, you’re usually locked into your payment plan when you finalize the loan. If your lender is unwilling to adjust your repayment schedule, you may need to refinance your loans with a new lender. Most private lenders offer repayment terms between five and 20 years. Usually, shorter repayment terms will have lower interest rates than longer terms. Be sure to choose a repayment term with a monthly payment that you can comfortably afford.
4. Search found money
The concept of “found money” refers to money that is legally yours but has not been claimed. You may be eligible for unclaimed money from old bank accounts, government agencies, insurance policies or former employers. You can search found money via official government websites.
Be sure to search for silver found in every state you’ve lived in, no matter how long. If you are married, find money for yourself and your partner. If you inherited someone’s money, you may also be eligible to claim any money found in their name.
5. Use deals
If your main goal is to get out of debt quickly, consider diverting your windfall earnings to your student loans. Windfall gains include unexpected cash flow such as tax refunds, inheritances, and work bonuses. Every time you receive an amount of money that you weren’t counting on, it’s a godsend.
When you get a windfall, decide how much to allocate to your loans. The amount you choose depends on your other goals or expenses. Cover immediate necessities first or consider topping up your emergency fund if needed. Anything left over can be applied to your student loans as an additional payment.
6. Research refinancing options
If you have high-interest student loans, you may be able to pay them off faster by refinancing them. Refinancing your student loans means switching to a new lender that offers a lower interest rate or better terms.
You can use a refinance calculator to see how much refinancing could save you. Let’s say you owe $40,000 with a 10-year term and an interest rate of 7%. Your monthly payment is $465.
If you refinance on a 7-year term and an interest rate of 4%, your new monthly payment will be approximately $545, an increase of $80. However, you’ll pay off your loans three years earlier and save $9,800 in interest.
There is a downside to refinancing, especially if you have federal loans. When you refinance federal loans, they become private loans and lose all the benefits of federal loans, including income-based repayment plans, longer deferment and forbearance periods, and loan forgiveness programs. ready.
In addition, since the start of the Covid-19 pandemic, the government has suspended the repayment of federal student loans and fixed interest rates at 0%. This same provision has not been extended to private loans.
If you have a combination of federal and private loans, you can refinance the private loans at a lower interest rate and keep the federal loans intact. It could give you the best of both worlds.